If you are in IT, understanding the corporate structure and all the players within it is vital. Words like directors, shareholders, and officers are often bandied about, and its good to really understand who they are, what roles and responsibilities they have within the company.
There are three types of people involved with a corporation: directors, officers, and shareholders. Each of these groups has its own responsibilities and powers within the corporation. Small corporations often have overlap between these positions. It is not uncommon for one person to be a director, a shareholder and an officer, but it is important to understand the different roles each position must play in corporate governance, even if it is the same people filling all of these roles. Today we are going to look at the roles directors and officers play within the structure of corporate governance, and tomorrow we will examine how larger and smaller corporations can differ by focusing on shareholders and the “One Man Corporation.”
The directors of a corporation are required to supervise the management of the business and affairs of the corporation. Directors do not have to be actively involved with the operations of the business; they are essentially the body that oversees the corporation’s affairs. The power of management that the directors hold can only be limited by a unanimous shareholder agreement signed by all of the corporation’s shareholders, which can transfer some or all of the directors’ powers and responsibilities to the shareholders.
There are two general types of obligations that a director has with respect to the corporation. The first is a duty to act honestly, in good faith, and with a view to the best interests of the corporation. The second duty a director must observe is the duty to exercise the care, diligence, and skill of a reasonably prudent person in comparable circumstances.
In order to act as a director, there are four basic qualifications. The director must be an individual (meaning not a corporation), at least 18 years old, of sound mind, and not bankrupt. At least twenty-five per cent of the directors of any Canadian corporation must be Canadian citizens that are ordinarily resident in Canada.
The first directors of a corporation must be specified upon incorporation. These directors hold office until the organizing meetings of the directors and shareholders are held, at which point new directors may be elected. Each director may be elected for a different length of time. The corporation’s articles must also specify whether there will be a fixed number of directors or whether the number of directors will be allowed to vary within a specified range.
Directors act by passing resolutions, which can either be done at a meeting of the board of directors or by way of written resolution signed by all of the directors. In practice, the directors make decisions such as declaring dividends, adopting or repealing by-laws, approving financial statements, issuing shares, or selling part of the business.
The types of roles and responsibilities a corporation’s board of directors take on vary from corporation to corporation. Generally speaking, it is the directors who manage the most important parts of the business and who make the most important decisions regarding the business. As we have noted, they must perform their duties to a reasonable standard of diligence. If they do not, they risk being held personally liable for their errors and omissions.
The directors of a corporation are authorized to designate the offices of a corporation, appoint officers, specify their duties, and delegate certain powers of management and supervision to them. These powers are usually specified in the general by-law of the corporation. Some of the more common officer positions created in Canadian corporations are the chief executive officer, the treasurer, and the secretary.
Officers of a corporation are subject to the same duties as directors: the duty of care and the duty to disclose interests in material contracts or transactions. Their rights and responsibilities vary from corporation to corporation and are laid out by various sources, including by-laws, directors’ resolutions, shareholders agreements, and the articles of incorporation.
Tomorrow, read about shareholders and ‘the one man corporation’ in Corporations 101 for tech pros: Who makes up a corporation? (Part 2)
October is small business month and to celebrate, writers from Aluvion Law will be making daily posts on one of the most common forms of Small Businesses: Corporations! Corporations are particularly popular among the high-tech and IT crowd because of the tax advantages they provide to rapidly growing companies, as well as the assistance they can provide in unlocking capital. The other great benefit recognized by the ‘serial entrepreneurs’ that flock to the IT sector is that they limit the liability of the owners in the event of the business failing.